How India will grow out of technical recession

The second quarter of 2020-21 growth, was predicted by RBI to be negative 8.6 per cent, to that account we can say that the performance was better, but it does not bode well with the overall trajectory of growth with this quarter shrinking by 7.5 per cent over last year?? same quarter. Sequentially however the first quarter was dismally low at negative 23.9 per cent, so the growth and pick up of economic activities after the lock down is now happening. But let us have a good glimpse at the gross value added data.

The sectoral performance in GVA shows agriculture and power as the only two sectors that continued its positive momentum, with a very slight positive 0.6 per cent growth in Manufacturing. The rest of the sectors continue to move in the negative territory, albeit some sequential improvement over last quarter barring financial and real estate and public, defence and other services. The real drop in real estate alone is a staggering 13 per cent over the previous quarter.

The real issue at hand is however the consumption area of the economy, which continues to bother most economists the world over and is a demand side of the story. Consumption drop in Quarter two was 11.3 per cent, which has some unusual suspects. Let me start with the government consumption expenditure, which contracted by 22 per cent in the second quarter, whereas it grew by 16 per cent in the first quarter. While private consumption grew in this quarter, with an improved gross capital formation, which moved from negative 47 per cent in quarter to a negative 7.4 per cent, we need to have a close watch of what happens to private consumption in the next quarterly series.

The manufacturing sector had some tailwinds, which came from lower input costs, lower wage bill and extremely rugged cost cutting measures, which were all positives to the gross value added, but that is still not enough to influence the overall trajectory significantly. Government spending coupled with monetary transmission reaching into goods and service sectors of the informal economy can only make things better.

RBI is slated to announce the new monetary policy directives this week, but most expect the rates to be kept unchanged due to the following factors:

l CPI inflation (retail Inflation) was at a six-year high of 7.61 per cent in October, while wholesale price-based inflation rose to an eight-month high of 1.48 per cent.

l Focus on desired liquidity to ensure optimum balance between rates and monetary transmission. We will briefly see how this is interconnected.

Focus on liquidity has been a key area of concern as corporates have moved to conserve cash in quarter one and two. Liquidity continued to be under stress as formal channels of liquidity may not be able to penetrate the requirements and needs of informal businesses that cover a large portion of the economy. Many firms attempt to conserve liquidity and increase their cash balances, which would cascade into falling payment volumes, thus aggravating the situation. The payment system thus adds to the transmission of liquidity shock. RBI has gone all out to improve the trade credit situation but once a critical threshold of trade debtors??defaults/delays is reached, there is possibility of sudden shocks in parts of the market. This is never made easy by many firms adding pressure by delaying the payment cycles even in the current quarter.

As the economy is coming back in the third quarter of the year, the liquidity focus coupled with a steady rate (including a confident communication) from the RBI will do good to the economy.

ABOUT THE AUTHOR:

Procyon Mukherjee is an ex-Chief Procurement Officer at LafargeHolcim India.

Quarterly estimates of GVA of basic prices in Q2 (July-September) of 2020-21 (at 2011-2012 prices)